One of the major pain points for the OOH industry in the Union Budget 2015 was the increase in service tax to 14 per cent from the earlier 12.36 per cent. The word is that with GST imminent in 2016, the tax is expected to go up to 16 per cent, further adding to their woes.
OOH sector welcomes the Budget as positive and balanced
Agency heads we spoke to confirmed that this was a definite possibility but they do not see any way out of it. Atul Shrivastava, COO at Laqshya Media said that it was highly likely that there would be one final rate rise before settling down, though he was unsure about whether it would rise to 16 per cent. On the current increase, he said that there would definitely be a negative impact though it was difficult to predict the extent of the impact.
“The impact will be more in smaller cities and on smaller media owners, who depend on local clientele. Increased cost may not show in the overall business of the agencies, but it’ll affect the gains of the industry through its natural growth,” he said.
The usual practice is to offset the cost to the client but the problem is also about the cash flow. Explains Rajneesh Bahl, CEO at Percept OOH, “At the end of the month I have to deposit the service tax to the government irrespective of whether I get the money from the client or not, so my cash flow gets hit.” The problem stands to get compounded further if any client does not make payments in case of complaints (perceived or otherwise) or any other reason; something that the outdoor industry does face.
This would then mean that the agency is paying the service tax from its own pocket in lieu of receiving client payments. So, an agency having a monthly turnover of Rs 100 crores might stand to pay Rs 14 crore from its own pocket if client payments don’t come in on time.
The problem thus seems to be two-fold; on the one hand the fact that outdoor advertising might become slightly more expensive for clients and hence that much more unattractive. The second issue is with the cash flows that we mentioned earlier.
Union Budget 2015: OOH sector unhappy with service tax hike
The problem with cash flows has cropped up relatively recently after the government decided to start taxing on bidding revenue rather than actual payment receipt. “The best thing to do would have been to link it to realizable or collectible revenue rather than bid revenue, which was suggested to the government,” says Rajiv Saxena, MD of Blue Ocean Media.
The ideal solution would seem to be that the OOH industry streamlines the process of payment collection by enforcing stricter rules against defaulters. However, with the fragmented and disorganized state of the industry currently, this does not seem practical immediately.
“The government has implied this too (streamlining payment collection). If everyone follows this religiously, then it will be great but this does not happen,” added Bahl.
Others like Rajan Mehta, MD and Founder of LiveMedia feel that the increase in service tax, though a negative in the short term, will not have a major impact in the long run. “Historically, we have seen that as soon as GST comes in, tax rates go down. So, over a period of time, we should actually see tax rates reduce in the country,” he said.
Meanwhile, players like Rajiv Saxena and others are disappointed that the government does not seem to be paying attention to their woes. “It is a one way street. We keep making requests, which they ignore,” said Saxena. However, he agreed that the increase in service tax will not likely lead to an increase in advertising costs.
The industry body for outdoor advertising, IOAA, is expected to have a meeting of its members in the coming days to discuss a number of issues the industry currently faces and many outdoor players will be hoping for some positive steps to allay these worries.